American Economic Journal: Macroeconomics
no. 4, October 2023
Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany's underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool when monetary policy is constrained.
Erceg, Christopher, Andrea Prestipino, and Andrea Raffo.
"Trade Policies and Fiscal Devaluations."
American Economic Journal: Macroeconomics,
Business Fluctuations; Cycles
Trade Policy; International Trade Organizations
International Monetary Arrangements and Institutions
Taxation, Subsidies, and Revenue: General